Waiting For Those Cheap Oil Prices? Just Keep On Waiting

December 03, 1985|By Knight-Ridder Newspapers.

By rights, prices for petroleum products should have been dropping right along with the temperature this fall.

With the Organization of Petroleum Exporting Countries falling apart, and its members threatening to open the taps wide, oil should be getting cheaper by the day, carrying down gasoline and heating-oil prices as well.

But it`s not.

Proving again that it`s tough to outguess the oil market, prices of finished oil products have been going up, and the outlook is for slightly higher costs to consumers, at least until spring. Crude-oil prices, while expected to drop on average throughout the winter, have been higher on spot markets recently.

This seeming contradiction between crude-oil prices that are moving lower and heating-oil and gasoline prices that are heading higher is a result of supply and demand. In part, the anticipation of lower crude-oil prices in the long run has forced consumer prices up.

What happened is that U.S. refiners let their inventories of both crude and refined oil dwindle in the third quarter of this year because they anticipated lower crude-oil prices in the fourth quarter. They planned to buy crude at the projected lower prices, then process it into heating oil and gasoline.

But a last-minute flurry of crude-oil buying going into the heating season increased the demand enough to force up the spot market price of crude. As a result, finished products--heating oil and gasoline--cost more. In addition, because the stocks of heating oil had been allowed to diminish, the increased demand brought on by the heating season also helped push up consumer prices.

The Energy Department expects retail heating-oil prices to be about 2 cents a gallon more this winter than last year, even though crude oil is expected to average about 5 cents a gallon less.

Dan Lundberg, who conducts a national weekly gasoline-price survey, said prices had risen about 6.35 cents a gallon since Jan. 1, and predicted an additional 1.65-cent increase by the end of December.

``Last August you couldn`t have gotten many bets that this was going to happen,`` said Dillard Spriggs, an independent New York oil analyst. At that time, Saudi Arabia was talking of doubling its daily production in response to widespread violations of OPEC`s official quotas, and some analysts were talking of a ``freefall`` in worldwide crude prices.

OPEC hasn`t shown any more signs of togetherness, but the fear of plummeting prices did change the behavior of oil processors and refiners around the world. Throughout the summer and fall, analysts say, they allowed their stocks of both crude and refined oil to decline, buying only as much crude as they needed to meet immediate demand.

Fall is normally the time when stocks are built up, in anticipation of the winter heating season. But this year, because refiners had intentionally permitted their stocks to dwindle, there was a rush of buying at the last minute, which drove crude prices up. At the same time, as demand for refined heating oil rose in the fall, it put upward pressure on the price because stocks were low.

``Everyone is fearful of a price decline,`` said Arnold Safer, head of the Energy Futures Group in Baltimore. ``For six months now, nobody has wanted to hold inventory. Refiners and distributors have gone hand-to-mouth, buying only what they need for prompt delivery.

``Coming into the winter with low inventory, they`ve got to make more, therefore they`ve got to have more crude. So they start bidding up the price.``

On the New York Mercantile Exchange`s futures market, some crude oil has traded on a spot basis for $31 a barrel, up from a little under $30 earlier in the year. But Safer said similar trends had not occurred elsewhere in the world. Prices have been more stable in Singapore, for example, where much of the Arab world`s crude is traded for distribution to Japan and the Far East.

Adding to the upward pressure on heating oil are the overhead costs for local dealers.

Gasoline costs have been pushed up in part by the federal Environmental Protection Agency`s demand that refiners remove nearly all the lead from regular gasoline by Dec. 31. The Energy Department estimates that the lead phasedown will add between 1 and 2 cents a gallon as refiners boost the octane of regular gasoline with other, more expensive chemicals.

The EPA dropped the allowable levels of lead in gasoline to 0.5 gram per gallon after July 1, and 0.1 gram per gallon after Dec. 31. That`s down from last year`s allowable level of 1.1 grams per gallon.

Consumer demand for both heating oil and gasoline is still not going to warm the oil industry`s heart, however.

While the nation`s total need for energy is growing by about 1 percent a year, the Energy Department says, demand for petroleum products is expected to remain right where it is, at about 15.7 million barrels a day, for the next couple of years.